Working capital can be a major use of funds and for some companies is the largest component of their financing need.  Yet there are other companies that are growing very rapidly, yet require hardly any working capital funds.

 

The difference is their working capital cycle.  This refers to the number of days from first payment for work in progress/product to final customer payment including:

• When money is first paid out for inventory and/or labor.
• Transit time to the warehouse.
• Days the product is in inventory.
• Shipment time to the customer.
• When money is received from the customer.

             
       There can be overlap between these categories.  I find it easiest to chart this in Excel, with each step in rows going down and dates going across.  This shows the overlap well while showing the total cycle time.

A company that has a working capital cycle of 90 days might have total net working capital of $15 million.  If they were able to cut the cycle down to 60 days, their working capital could fall to $10 million.  $5 million of capital can be freed up for other purposes.